South Africa: Lean times for construction

Despite the potential of a massive infrastructure-spending programme by the South African government to spur growth for the construction industry local contractors are grappling with delays in tendering many projects, which is leaving order books thinly marked and confidence low.

The government plans to spend $95bn on infrastructure development by 2015, and a total of $450bn by 2027, and yet the construction industry felt only some of the benefit of these spending programmes, with many projects yet to be tendered or behind schedule, Reuters has reported.

This is a concern, given the potential for increased employment and activity the infrastructure programme offers, but there are a number of bright spots in terms of broader project delivery, however, as highlighted by Malusi Gigaba, the minister of public enterprises, in a briefing to parliament on February 20. Several major developments remain on track and are achieving their goals of boosting employment and bolstering infrastructure. In total, more than $6.8bn had been laid out on strategic infrastructure projects, he said, with nearly 16,000 new jobs created to date.

Gigaba went on to state further that, while there had been significant progress in some areas, it was essential that the momentum of the programme be maintained and increased. “Of paramount importance is that we cannot allow this massive investment programme to be impacted by the global economic slowdown or derailed by lack of funding,” he said.

While a number of projects are well advanced, progress in state-backed developments is by no means universal, with many agencies over the past few years reporting significant under-spending in their capital works programmes. Project delivery has historically been a weak spot in public spending programmes. Two years ago, only just over two-thirds of the planned projects for the fiscal year 2010/11 were actually implemented.

Despite agreeing with Gigaba that the development programme is vital, Kevin Lings, the chief economist at Stanlib, an asset management firm, says the rollout of major projects faces a number of obstacles. “The problem is getting the plan implemented in terms of initiating the contracts,” Lings told Reuters in mid- February. “You have to cut through the bureaucracy and get projects implemented.”

Indeed, slow implementation is impacting the industry. According to a recent survey by the First National Bank (FNB) and the Bureau for Economic Research (BER) regarding confidence in the building sector, sentiment had slipped after regaining some ground in the third quarter of 2012. The study, released in January 2013, showed the FNB/BER construction confidence index fell to 36 in the fourth quarter of 2012, down from 42 the previous quarter.

According to Cees Bruggemans, a consulting economist at FNB, the results indicate that six out of 10 respondents were dissatisfied with prevailing business conditions. “The slight drop in confidence suggests that the recovery recorded for most of the year moderated somewhat during the fourth quarter of 2012,” he said. “Increased margin pressure‚ low levels of profitability and a mild slowdown in construction activity growth were the main culprits behind the fall in confidence in the fourth quarter of 2012.”

If confidence within the sector is weak, it will be further shaken after it was announced in early February that police were conducting an investigation into allegations of widespread malpractice in the bidding for construction tenders by firms in the industry. The police probe was being run independently from another investigation, launched in 2011, by the Competition Commission into claims of overpricing in the sector. As many as 70 projects with a combined value of some $3.4bn were under investigation.

While there is no suggestion that the majority of construction firms have engaged in questionable or anti-competitive practices, the twin investigations will likely slow activity until the results are published. Ultimately, though, the investigations should result in a more transparent construction sector.